TIOL Update, Friday, May 11, 2018

CASE STORIES

CASE LAWS

2018-TIOL-884-HC-AHM-IT + Case Story

SANIDHYA Vs DCIT : GUJARAT HIGH COURT (Dated: March 5, 2018)

Income Tax - Writ - Section 80IB(10).

Keywords: Finality of an issue - Net profit - Outstanding capital - Original assessment proceeding - Partnership deed - Partner's capital fund - Remuneration & Working partner.

The assessee firm, engaged in construction related activities, had returned income for the relevant AY. The assessee's return was taken in scrutiny by the AO, who passed an assessment order u/s 143(3). However, later, the AO noted that excess deduction was claimed and allowed to the assessee u/s 80IB(10) as net profit of the undertaking was calculated without debiting the payment of interest on partner's capital. As per the partnership deed, interest was payable to the partners at the maximum rate of 12% on the investment by them in the firm. Accordingly, the interest on partner's capital works out to Rs.18,93,189/@ 12% of the closing partner's capital balance. The AO believed that by not debiting on partners capital fund, the assessee had incorrectly enhanced the claim of deduction u/s 80IB. Further, as per the partnership deed, the remuneration will be paid in the maximum limit u/s 40(b)(v). Therefore, the AO issued reopening notice. However, such notice was objected which was subsequently rejected by the AO.

In Writ, the High Court held that,

Whether HC can give finality to an issue even if, the issue at hand was never dealt with the AO, at the time of original scrutiny assessment - NO: HC

++ the disputed notice has been issued within a period of four years from the end of relevant AY. Further, it is not even the case of the assessee that during the original assessment proceedings, the issues raised by the AO had come up for scrutiny. In other words, the assessee has not argued that the reopening of the assessment is based on change of opinion. The assessee's main ground is that the AO has proceeded on amended partnership deed ignoring the material amendments;

++ in this context, we may recall, in the reasons recorded, the AO had objections to the assessee's claim of deduction u/s 80IB(10). According to him, such deduction was inflated on two counts, i.e. (i) the partnership firm was not paying interest on the partner's capital invested with the firm and (ii) it was not paying remuneration to the partners. In this context, the AO referred to two clauses of the partnership deed. One of such clauses provided that whatever capital is invested in the firm, interest will be payable at the maximum rate prescribed under the Act and the other clause provided that the working partners of the partnership firm shall be paid remuneration for the special work and such remuneration will be paid within the maximum limit under the Act. It is not in dispute that the assessee did not pay interest on the outstanding capital invested by the partners in the partnership firm and that it paid remuneration to only one out of the several partners;

++ we are concerned with two amendments in the partnership deed dated 17.04.2006 and 15.08.2007 respectively. The amendments were not part of the original assessment proceedings. The AO was, therefore, guided by the original unamended partnership deed while recording the reasons. These changes were brought to his notice by the assessee through objections raised to the reopening notice. The AO discarded the objections based on the changes in the said deed on two grounds; firstly, the AO was of the opinion that the assessee, being a registered partnership firm and the original partnership deed, having been duly registered, any changes by way of amendment are also required to be registered under the Partnership Act, 1932. The second reason for rejection of the objections was that such changes appear to be an afterthought and also being unregistered, the authenticity being questionable;

++ the Counsel for the assessee took us through the provisions contained in Chapter VII of the Partnership Act, 1932 pertaining to registration of firms to contend that there is no requirement under the said law to have the amendments in the Partnership Deed registered. The AO cannot, therefore, refuse to take into account such amendments merely on the ground that the same were not registered. We are, prima facie, of the view that none of the provisions contained in ChapterVII of the Partnership Act, 1932 provide for compulsory registration of the amendments in the partnership deed;

++ however, in the present case, we are not inclined to conclude this issue and give finality to the issue. This is so because, even if the requirement of compulsory registration of the amendments is ignored, the question of the changes being genuine, authentic or contemporaneous, still survives, which is an issue which was never gone into at the time of original scrutiny assessment. In fact, admittedly, the amendment in the partnership deed did not form the original assessment proceedings at all. When the reopening notice has been issued on the basis of reasons recorded on the strength of the materials on record, we would not go behind the sufficiency of such reasons when we find that there was a live link between the material at the hands of the AO and his formation of belief that income chargeable to tax has escaped assessment. Therefore, while keeping the question of requirement of compulsory registration of the amendments in the partnership deed and the authenticity of the amendments in the partnership deeds relied upon by the assessee, subsequent to the issuance of the notice of reopening and recording of reasons open, the petition is dismissed.

Assessee's Writ petition dismissed

2018-TIOL-883-HC-AHM-IT

GUJARAT TELEVISION PVT LTD Vs ACIT : GUJARAT HIGH COURT (Dated: March 5, 2018)

Income Tax - Writ - Section 68.

Keywords: Reassessment - Supporting evidences - Unaccounted credit - Unsecured loan.

The Assessee-company filed return for the relevant AY and such return was taken in scrutiny by the AO and accordingly, the assessment was completed. However, the AO thereafter, noticed that the assessee had received huge amounts from various companies in various dates and repaid the same on the same date on which date the same was been received. For the reference year ie. FY 2009-10, it was also seen that the company's paid up share capital was of Rs. 1,00,000/- and the R&S was slightly increased to Rs. 5,05,834/-. Such company also shown the unsecured loans of Rs. 4,99,81,470/- in the balance sheet. In that year also, such company's income from its operation was only Rs. 30 lacs and the net profit for the year was of Rs. 168794/-. That company had filed its return of income of Rs. 2,86,520/-. In the FY 2010-11 also, it was seen that the company's share capital had increased substantially from Rs. 1,00,000/- to Rs. 1,90,00,000/- and the R&S was increased to Rs. 5,23,72,602/- which includes the security premium a/c of Rs. 7.1 cr. The company had shown unsecured loans at Rs. Nil in the balance sheet. During that year, the company had shown income from its operations at Rs. 3.62 cr and other income at Rs. 1.03 cr and filed its return of income for Rs. Nil claiming loss of Rs. 2.09 cr. for the AY 2011-12. From analyzing the return of income of the such companies who had extended unsecured loans to GTPL, it was observed that those companies did not had the creditworthiness to advance such huge money.

Accordingly, the AO issued notice of reopening. Therefore, the assessee filed present writ petition contending that the AO had issued such notice without proper application of mind and further that the reopening had been resorted to for further investigation which was not permissible.

On hearing the matter, the High Court held that,

Whether the AO can proceed to reopen the assessment by invoking section 68 in relation to unsecured loan received by the assessee, in absence of supporting evidences for the same - NO: HC

++ the Assessing Officer himself has recorded that the advances made by the said eight companies were squared up on the same date on each occasion. There is nothing on the record to show that such amounts were later on converted from unsecured loans into share capital of the company with premium. When the advances were squared up on the same date, nothing remained outstanding at the end of the day, much less at the end of the financial year. There was no question of such amounts being unsecured loans of the company which stood converted into share capital with premium. In fact, accounts of the assessee company for the subsequent assessment year which have been produced on the record would show that the share premium shown to have been received of Rs. 4.19 Crore was from one Vikas TV Alliance Private Limited and it is this Vikas TV Alliance Private Limited which had advanced unsecured loan of Rs. 4.99 Crores during the said period. If the Assessing Officer had reason and therefore wanted totarget this transaction, the issue would have been examined differently. However, apparently, the Assessing Officer seems to have linked the unsecured loans of Rs. 4.82 Crore shown in the accounts book of the Company received from eight different companies to the action of the company of convering unsecured loans in the later year. There is absolutely no link between the two sets of transactions. The Assessing Officer seems to have proceeded completely on misapplication of facts. Counsel for the Revenue, however, vehemently contended that this was a simple case of unaccounted credit in the accounts of the company when it is found that the later on these companies did not have the creditworthiness, provisions of Section 68 of the Act could be invoked. This is the reading by the counsel of the reasons recored by the Assessing Officer, that much one is unable to concur. The Assessing Officer has proceeded entirely on different footing. His case simply put is that this amount of Rs. 4.82 Crore which was in the form of unsecured loan was in the later year converted into share capital with premium, a facet which he would be unable to support from the material on record.

Assessee's writ allowed

2018-TIOL-882-HC-AHM-VAT + Case Story

STATE OF GUJARAT Vs GAIL INDIA LTD : GUJARAT HIGH COURT (Dated: March 9, 2018)

Gujarat Valaue Added Tax

Keywords - Condonation of delay - Deduction - Discount given

THE assessee company is a leading entity engaged in the processing and distribution of natural gas in India. During assessment for the relevant AY, the assessee claimed deduction of the discount granted by it to its oil marketing company on turnover sales. While the Assessing Authority initially denied such deduction, the same was allowed to the assessee by the Tribunal, on subsequent appeal. Hence, the present appeal by the Department was filed, also seeking to condone a 444-day delay in filing such appeal.

On hearing the matter, the High Court held that,

Whether a 444-day delay by the VAT Department in appealing against a Tribunal order can be condoned where such delay was caused due to misplacing of relevant documents by the office of Government Pleader - YES: HC

++ it can be seen that the reasons cited for preferring the appeal after delay mainly raised on two grounds. First is that the administrative clearances and decisions take sometime. It is pointed out that the judgement of the Tribunal dated 24.02.2016 was received on 28.03.2016. After receiving opinion from the concerned authorities, the Commissioner, Commercial Tax Department, sent a proposal to the Government for filing appeal on 30.05.2016. Queries in this respect were made and replied by the Commercial Tax Department. Ultimately, approval was received from the Government on 05.07.2016. Necessary documents were supplied to the office of the Government Pleader on 13.07.2016 with instructions to file tax appeal. However, such papers were misplaced in the office of the Government Pleader. This was brought to the notice of the Officer of the Government Pleader upon which, immediately the officers were contacted in March 2017. In response to this, second set of papers were handed over to the Government Pleader's office on 29.06.2017. The Tax Appeal was drafted and forwarded to the VAT Department on 12.07.2017. After receiving from the VAT Department, it was filed in the High Court on 09.08.2017;

++ thus the delay is properly explained. It is true that there was a clear error on part of the Government Pleader's Office in not taking prompt steps for drafting and filing the Tax Appeal. However, Government Pleader's Office owned up this mistake. It is stated that after receiving the papers on 13.07.2016, the same were misplaced. When this came to light, the VAT Department was contacted in March 2017 for supplying second set of papers. Government Pleader's office received such papers on 29.06.2017. Tax Appeal was drafted and sent to VAT Department on 12.07.2017 and the appeal was filed on 09.08.2017.

++ this is therefore not a case where long stretch of delay had remained totally unexplained. Considering the explanation rendered for the delay caused in filing appeal and the tax implications involved, we are inclined to condone the delay. Of course, upon the cost being paid to the assessee. Not condoning the delay would amount to terminating an issue involving sizeable tax implications without the High Court considering the same on merits. Hence, considering the decisions in various applicable precedent cases, delay is condoned however, on the condition that the applicant shall pay cost of Rs. 25,000/- to the assessee latest by 30.04.2018.

Revenue's application allowed

2018-TIOL-881-HC-AHM-IT + Case Story

JB ENTERPRISE Vs ACIT : GUJARAT HIGH COURT (Dated: April 9, 2018)

Income Tax - Sections 10B, 80HHC, 143(3), 147 & 148.

Keywords - Cutting and polishing of diamonds - Export oriented unit - Explanation 4 to Section 10B - Manufacturing process.

The assessee, partnership firm engaged in the business of import of rough diamonds and export of finished diamonds after cutting and polishing them, had filed the return for relevant AY. The assessee claimed deduction u/s 10B of the Act. During assessment, AO noted that the assessee firm had its manufacturing unit at Surat, Ahmedabad and Visnagar. It had also started a separate manufacturing unit at Surat which was a hundred percent export oriented unit. Income from such activity was claimed exempt u/s 10B of the Act. After completing assessment, the AO reopened the assessment by issuing notice u/s 148 of the Act on the ground that section 10B was amended by which explanation 4 was inserted by the Finance Act, 2003, providing that for the purposes of the said section "manufacture or produce" would include cutting and polishing of precious stones and semiprecious stones. The AO was therefore, of the opinion that such activity of cutting and polishing of diamonds would qualify for deduction u/s 10B of the Act only after such amendment and not for the period prior thereto. The AO passed order u/s 143(3) read with section 147 of the Act and did not allowed deduction u/s 10B of Act. However, he accepted the assessee's alternative contention and held that the assessee would be eligible for deduction u/s 80HHC of the Act. On appeal, CIT(A) and Tribunal upheld the order of AO.

After hearing parties, the High Court held that,

Whether explanation 4 to Section 10B is prospective and not retrospective and clarificatory in nature as claimed by the assessee - YES : HC

++ section 10B of the Act, provides for deduction of profits and gains derived by a hundred per cent export oriented undertaking from export of articles or things for a specified period from the time undertaking begins to manufacture or produce articles or things. Explanation 4 which was added to the said section with effect from 1.4.2004 provides that for the purposes of this section, "manufacture or produce' shall include the cutting and polishing of precious and semiprecious stones. In plain terms, this provision has been made applicable without any retrospectivity. The language of the provision also does not make it clarificatory. The budget speech of the Finance Minister explaining introduction of the said provision would also not help the assessee. In such speech, while allying the fears of gem and jewellery industry about withdrawal of benefits under section 10A and 10B of the Income tax Act, it was further stated that " Keeping in view the substantial value addition that takes place in cutting and polishing of diamond and gems, it is also proposed to extend the benefits u/s.10A & 10B of the Income tax Act to these activities. It is also proposed to insert explanation 4 at the end so as to provide that for the purpose of this section, "manufacture and produce" shall include the cutting and polishing of precious and semiprecious stones." It was stated that these amendments will take place from 1.4.2004 and would accordingly apply in case of assessment year 2004-2005 and subsequent years. Likewise, the memorandum explaining the provision of the Finance Bill, 2003, also provides that with a view to give fiscal support to the exporter of precious and semiprecious stones, it is proposed to insert a new explanation 4 at the end so as to provide that for purposes of this section, the expression "manufacture and produce" shall include the cutting and polishing of precious and semiprecious stones. There is nothing in the budget speech or memorandum explaining the relevant provisions of the Finance Bill to indicate that insertion of explanation 4 to section 10B was either an exercise of clarification or meant to be applied retrospectively. In fact, every indication is to the contrary. The Finance Minister made it clear that the provision is prospective and would apply to the period post 1.4.2004. The assessee would therefore, not be correct in basing reliance on the said provision or the budget speech of the Finance Minister explaining the reason for introduction of the provision;

Whether the process undertaken for cutting and polishing the diamonds amounts to manufacture or production of new article eligible for deduction u/s 10B of Act - YES : HC

++ even if explanation 4 to section 10B was meant to be prospective, in absence of any such provision, the assessee succeeds in establishing that activity of cutting and polishing diamonds amounted to manufacture or production of article or thing, and automatically qualify for deduction u/s 10B of the Act. In case of Grasim Industries Limited it was observed that term 'manufacture' includes any process incidental or ancillary to completion of manufactured product. Same can be a process in manufacture or process in relation to manufacture of the end product, which involves bringing some kind of change to raw material at various stages by different operations. Process must have effect of bringing change or transformation in raw material and also lead to creation of any new and distinct and excisable product;

++ it is undisputable that the rough diamonds are subjected to the process of cutting and polishing to bring into existence the polished diamonds. Such process has been noted by the Tribunal in the judgment in case of Flawless Diamond (India) Ltd. Counsel for the assessee placed reliance on the Article by one Akiva Caspi titled as "Modern Diamond Cutting And Polishing". This Article essentially aims to explain the complexities involved in the process and the sophistication required to carry out such process in order to optimize the value and quantity of the polished diamonds that may emerge out of such process. Whether carried out manually or through sophisticated machines, it is impossible to deny that the process of cutting and polishing diamonds is a complex one requiring specialized knowledge and expertise at every step. Rough unpolished diamond on one hand and cut and polished diamond on the other differ completely in appearance, value and uses. Thus this process of cutting and polishing diamonds brings into existence a new product which has totally different marketable commodity. From such Article, it was gathered that cutting and polishing diamonds have sparkle and definite desired shapes. Through this process thus a completely new commodity having a different market is brought into existence. The assessee is held entitled to deduction under section 10B of the Act.

Assessee's appeal partly allowed

2018-TIOL-30-AAR-GST

SONKA PUBLICATIONS (INDIA) PVT LTD : AUTHRITY FOR ADVANCE RULING (Dated: April 9, 2018)

GST - the applicant supplies educational books for increasing linguistic fluency in children - It raised the question as to whether such books are classifiable under HSN 4820 as 'Exercise Books' or under HSN 4901 as 'Printed Books' & HSN 4903 - The other issue is whether the applicant is liable to pay GST on the same - Considering their nature & purpose, the books are correctly classified under HSN 4820 - Hence they are not covered under Entry Nos 119 or 121 of Notfn No 2/2017- Central Tax (Rate) & corresponding SGST & IGST Notfns - Nonetheless, applicant is liable to seek registration if it has GST liability under reverse charge, even if it is not liable to pay GST on supplying such books: AAR.